Geographic adjustments to Medicare payments are intended to accurately and equitably address regional variations in wages, rents, and other costs incurred by hospitals and individual health care practitioners—but almost 40% of hospitals have been granted exceptions to how their adjustments are calculated, finds a new report from the Institute of Medicine (IOM). The rate of exceptions strongly suggests that the mechanisms underlying the adjustments are inadequate, noted the committee that wrote the report.

Using health-sector data from the Bureau of Labor Statistics (BLS) to develop its indexes for calculating wage adjustments for hospitals and private practice health professionals, because BLS's data are a "more accurate, independent, and appropriate source than the hospital cost reports, physician surveys, census data, and other information currently used."

Taking into account median-wage data for all types of workers in private practice settings and hospitals when calculating payments. Currently, regional wage differences are based on data for registered nurses, licensed practical nurses, health technicians, and administrative staff only. This does not reflect the full work force in many practices or hospitals.

Adjusting payments according to the labor market in which a hospital or practitioner operates and competes. Medicare should employ the metropolitan statistical areas developed by the Office of Management and Budget, which feature information on where people live and work and decisions made by employers and employees that define labor markets' boundaries.

Developing a new source of commercial rent data. Currently, Medicare uses median subsidized rents for a 2-bedroom apartment to assess variations in the price of office space.

The report is the first of 3 to be issued by the committee. A supplemental report that discusses physician payment issues will be issued this summer. A final report, to be released in 2012, will present the committee's evaluation of the effects of the adjustment factors on health care quality, population health, and distribution of the health care work force.